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spk05: Greetings and welcome to the Aurora Cannabis Inc. Second Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce to you Ananth Krishnan, Vice President, Corporate Development and Investor Relations. Thank you, Anand. You may begin.
spk10: Thank you, John, and good afternoon, everyone. We appreciate you joining us today. With me are CEO Miguel Martin and CFO Glenn DeBitt. After the market closed, Aurora issued a news release announcing our fiscal 2023 second quarter financial results. This news release, accompanying financial statements and MD&A, are available on our IR website and can also be accessed via CDAR and EDGAR. In addition, you will find the supplemental information deck on our IR website. Listeners are reminded that certain matters discussed on today's conference call could constitute forward-looking statements that are subject to risks and uncertainties related to our future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect actual results are detailed in our annual information form and other periodic filing and registration statements. These documents may similarly be accessed by CDAR and EDGAR. Following prepared remarks by Miguel and Glenn, we will conduct a question and answer session with our analysts. We ask you to limit yourself to one question and then get back in the queue for follow-up. With that, I will turn the call over to Miguel. Miguel, please go ahead.
spk07: Thank you, Anant. First and foremost, we are very proud to have achieved what we set out to do several quarters ago, namely reaching our objective of positive adjusted EBITDA by the end of the 2022 calendar year. We are confident that we can deliver positive adjusted EBITDA on an annualized basis going forward, although there may be some quarter-to-quarter variability due to the dynamic nature of the cannabis industry and the seasonality we previously talked about at our Bebo business. Importantly, as part of our business transformation, we also completed the structural changes we had intended to make as part of our cost rationalization. These will certainly yield benefits for Aurora in both the near and long term. Annualized savings now total approximately $340 million since February 2020 and included substantial progress in cutting quarterly SG&A to well below $30 million. Our next financial milestone will be achieving positive operating cash flow as part of our plan to build long-term shareholder value. We expect this to be a multi-quarter initiative and we will update the market on our progress to this new milestone. Looking forward, our enthusiasm for the future is anchored by our number one position in global medical cannabis among Canadian LPs and the growth we've been able to sustain despite some quarter-to-quarter variability. With loyal patients in existing markets and more developing countries poised to open, we think the top-line growth trend should continue. As a reminder, medical cannabis is a business we want to invest behind, not only because of its growth characteristics, but because of its defensive nature in volatile times. It also enjoys enviable adjusted gross margins that consistently exceed 60%, twice that of consumer cannabis. Aurora is also ideally positioned because of our robust balance sheet and net cash position, which puts us in select company among our industry peers. This has allowed us to repurchase approximately $302 million in convertible debt in the last 12 months, resulting in about $17 million in cash interest savings on an annual basis. Finally, our investments in science, breeding, and genetics have resulted in proprietary cultivars and driven meaningful improvements to yields and potency that have benefited all of our product lines. We also remain committed to furthering medical cannabis clinical research in Canada, which should position us for innovation, which will be a key factor to success going forward. So those key strengths as a backdrop, let's take a deeper dive into our global medical cannabis business. As we had expected, international medical revenue rose sequentially compared to Q1, which can be attributed to our strength in the Australian market as well as continued success in Europe. Our European business continues to demonstrate stability and growth on a year-over-year basis. Anchored by the German medical market, we remain number two in flowers. Based on recent comments from the Health Minister, we expect further clarity around recreational legalization in Germany sometime this spring, with a potential start to the market there as early as 2025. We continue to believe Aurora's position as one of only three companies with a medical domestic production license will give us a significant advantage as the regulatory framework is developed. We are also bullish on the opportunities that lie ahead in our other key European markets, which include Poland, UK, Czech Republic, and France. While markets such as Australia and Israel continue to develop, our presence across nearly a dozen countries outside of Canada affords us relative insulation to individual economic and regulatory climates. Turning to the high-margin Canadian medical market, most of the sequential growth in revenue was driven by a one-time benefit from Q1. However, Even after normalizing for this adjustment, we still experience a 2% growth in revenues. We are extremely happy with this when coupled with recent cost reductions, which drove meaningful improvements in profitability. Over the past several months, Aurora patients have been given access to the largest ever selection of products and formats on Aurora Medical, with over 75 SKUs launched in the medical channel between Q1 and Q2. These include products from our full portfolio of adult-use cannabis brands, such as bean quick strips, Ray Beard premium flour, and new pre-rolls, concentrates, and minor cannabinoid oils. Notably, our Canadian medical business benefits from strong patient retention, with insured patients comprising about 80% of all medical sales as part of a concentrated market with significant barriers to entry. Our industry-leading market share also remains at about 25%, roughly double that of our closest competitors. To sum up, we remain very optimistic for this segment, as we are not only increasing the number of patients in the insured category, but have also experienced year-over-year increases in basket size and participation rates. Note that only about 1% of the Canadian adult population is involved in medical cannabis, so any sort of movement makes a massive difference, with the benefits outsized to a very small subset of companies like Aurora that participate in this segment. Switching to Canadian Adult Rack, our Q2 revenue shows sequential growth of 7%. This increase was achieved despite some temporary industry disruption and a reduced number of shipping days over the holidays. The key driver for us here was strong sales execution, coupled with a strong pipeline of innovative new product offerings. As you may recall, one of the key reasons for our acquisition of Thrive last year was their ability to manage our Canadian Rack business. and we are thrilled to see our M&A strategy paying off. Finally, we plan to drive significant shareholder value over the long run through our controlling interest in Bevo, which is one of the largest suppliers of propagated vegetables and ornamental plants in North America. We are currently repurposing the Aurora Sky facility for orchid and vegetable propagation with minimal capital investment. This will not only increase Bevo's production capability and extended shipping range in Canada and the U.S., but also enable us to generate predictable, incremental revenue and adjusted EBITDA. And with that, now I'd like to turn the call over to Glenn for our financial review.
spk05: Thank you, Miguel, and good afternoon, everyone.
spk06: Before reviewing our Q2 financial performance, let me take a couple of minutes to discuss our balance sheet and cash flow. I'd like to reinforce what I said a number of times before, and that is we take great pride in having one of the strongest balance sheets among Canadian LPs and are one of a very few in the net cash position. Of course, we're always on the lookout for further opportunities to improve through smart and defensive capital allocation decisions. As of yesterday, February 8th, we have approximately $310 million of cash, including $65 million of restricted cash. And we believe this is sufficient to fund operations until we're cash flow positive. We have only $149 million Canadian of principal remaining on our convertible notes due in 2024. During Q2, we repurchased $135 million in principal on our convertible notes at a total cost of $128.7 million cash, including accrued interest. The debt we repurchased during calendar 2022 has resulted in cash interest savings that now total approximately $17 million annually. We also continue to have access to significant capacity under our base shelf perspectives, including approximately $180 million remaining under our ATM program. During Q2, we issued 39.5 million shares for net proceeds of $68.8 million. The current shelf will expire in April, and we do expect to refile a new shelf and ATM program at that time. And we reiterate that the proceeds from chair issuance are expected to be used only for strategic purposes. Our operating cash flow in Q2 consisted of a net use of $60.6 million. But that included $15.5 million for a number of one-time payments related to our business transformation. $12.4 million for once-a-year payments, such as insurance and Health Canada fees, and approximately a $12 million investment in working capital. So we are pleased with the positive impact our business transformation is having for our future cash flows. With the restructuring of our business now largely executed, we do not expect one-time payments to recur at these levels. And we do expect that the combination of reduced costs and increased revenue from the same footprint will be significant levers for the company to reach positive operating cash flow. At the same time, it is worth noting that there may be some quarter-to-quarter variability in operating cash flow. As we saw in Q2, when the company achieved significant increases to sales, the long cash conversion cycle of this industry means that investment in working capital may be required, which may negatively impact operating cash flow for that period. Quarterly capital expenditures were approximately $3.5 million, down 36% from the $5.5 million last quarter, and more than offset by $14.7 million of cash from the sale of our Polaris facility. Looking now to Q2 business performance. Q2 total net revenue grew 25% to $61.7 million, compared to $49.3 million last quarter. We saw strength across all business segments, while also benefiting from a full quarter contribution from Bevo. We achieved our goal of positive adjusted EBITDA, generating $1.4 million. This was primarily due to growing revenue in our industry-leading Canadian and international medical cannabis operations and from reductions in costs across our business, but primarily in SG&A. We've now stabilized the company into a much cleaner operating structure and see a real opportunity to drive more revenue from these assets in the future. Let me now address each of our businesses in a bit more detail. Canadian medical revenue was $25.8 million in Q2, up 10% from Q1. Much of the sequential growth in revenue was driven by a one-time revenue recognition benefit as more shipments than usual were in transit at the end of Q1. However, normalizing for this adjustment, Canadian medical still delivered a 2% increase. Performance, though, was important given that most of our final cost reductions were in this segment during Q2 2023. So looking forward to fiscal Q3, we expect the Canadian medical business to perform similarly to Q2, excluding that one-time revenue benefit of $800,000. International medical revenue was $13.8 million and reflected a 69% increase versus Q1. The segment rebounded from Q1, as expected, through shipments to export markets such as Australia, Poland, the UK, and Cayman Islands. and return to levels more consistent with Q4 of 2022. We expect our international business to deliver revenues in fiscal Q3 that are consistent with that of Q2. Taken together, our medical businesses in Canada and internationally generated $39.5 million of revenue, up 25% from Q1. Medical cannabis represented about 64% of our Q2 revenue, and 87% of gross profits. Adjusted gross margin was 61%, down from 67% in the prior quarter. The decrease was primarily driven by higher sales into certain international export markets, which yield a slightly lower adjusted gross margin, but still contributes strong positive gross profit. Consumer cannabis net revenue was $14.6 million, a 7% increase compared to last quarter. The Q2 increase was driven by growth in both Aurora's premium Sanraf brand, and by our value brand, Daily Special, which offers consumers a strong potency, quality, and price proposition. Looking forward into fiscal Q3, we expect the Canadian consumer market to continue to be fluid, with Aurora's top-line revenue being flat sequentially. Adjusted gross margin before fair value adjustments on consumer cannabis net revenue is 20% in Q2, compared to 25% in the prior quarter. The decrease was primarily driven by the incremental sales of value-branded products as just mentioned. Going forward, we of course remain committed to maximizing profitability through low-cost production and margin accretive categories, and all supported by our science leadership. Our controlling stake in Bevo enabled us to recognize $6.6 million net revenue during Q2, up from $3.3 million in Q1. This increase is a result of a full quarter of contributions compared to only a partial quarter in Q1. Bevo is categorized as plant propagation in our financial disclosures. As a reminder, Bevo has a seasonal cadence with two-thirds of Bevo's annual revenue in EBITDA being realized during the period from January to June. On an annualized basis, Bevo's business is steady, predictable, and supports our ability to generate positive adjusted EBITDA. Bevo's adjusted gross margin before fair value adjustments was 15% in Q2 compared to 16% in Q1. The adjustment primarily related to one-time weather-related impact on fuel costs, which management expects to be very transitory in nature. Due to seasonality, we would expect improved margins in the key spring and summer sales windows. Overall, Aurora has adjusted gross margin before fair value adjustments was 45% in Q2 versus 50% in Q1, still amongst the industry's best. Excluding the restructuring and non-recurring costs of $14 million in Q2, SG&A and R&D were well controlled, down 17% sequentially to $26.6 million. Notably, we have made good on our commitment to reducing SG&A to below $30 million as part of our business transformation plan a rate that we can sustain going forward. So pulling all of this together, we generated positive adjusted EBITDA of $1.4 million compared to a loss of $7.4 million in the previous quarter. And finally, just a reminder that our fiscal year 2023 has only three quarters, as we have changed our fiscal year end to March 31st, and that's in order to achieve certain internal costs and staffing efficiencies. So thanks for your interest. I'll now turn the call back to Miguel.
spk07: Thanks, Glenn. At Aurora, our purpose is opening the world to cannabis as a global leader in this very exciting industry. And in that spirit, let me share some final thoughts. First, we are very pleased to have completed our transformation plan, delivering on approximately $340 million in annualized savings since February of 2020. Our entire team's hard work resulted in positive adjusted EBITDA while maintaining a strong balance sheet that will allow us to compete at a very high level and take advantage of future global opportunities. Second, we've done this without sacrificing growth opportunities in our high-margin domestic and international medical cannabis businesses, which remain one of the best places in the industry to invest. Third, we completed our plan during a period of volatility and uncertainty around the Canadian rec market. The good news is it continues to rationalize, which will give us added opportunity for market share improvement. Finally, our future success will be enabled by science, through continued plant genetics, improving yields, and better crop quality. We believe this will drive high-margin new cultivar licensing opportunities in the future and place Aurora at the center of industry-wide innovation. Looking forward, we continue to focus on profitable growth opportunities across all segments, ongoing discipline and capital deployment, and improving operating cash flow. Taken together, our ability to make progress in these areas will position our shareholders for significant value creation. especially from these levels. Thank you for your time and interest in Aurora. Operator, please open the line for questions.
spk05: Thank you. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. And we ask that you please limit yourself to one question. Thank you. One moment while we poll for questions. And our first question comes from the line of Vivian Azar with Cowan. Please proceed with your question.
spk03: Hi. Thank you. Good evening.
spk05: Good evening, Bev.
spk03: So I wanted to dig in on medical cannabis gross margins, please. Down a little bit, you know, year over year and sequentially clearly was not an impediment to you guys hitting your target for positive adjusted EBITDA, which is really, really nice to see and congratulations on that. But given the call out that the margin dilution was coming from frontier markets, do you think that kind of current gross margin levels for that business are an appropriate run rate? It seems like you've got a lot of opportunity ahead of you and your mix to frontier market might, you know, kind of stay at these levels and or climb a little bit until there's a real catalyst in Germany. Thank you.
spk07: Yeah. I mean, so as it pertains to medical cannabis, I think structurally we don't see, you know, the margin compression that maybe you would see in the rack market. You know, we're up to about 25% of the Canadian business and the reimbursed market, which represents about 80% of our revenues in Canada is, is at a healthy number that is part of the overall system. Some of that was mixed, as you sort of mentioned, in Canada. But structurally, we don't see anything there. When you look internationally, you also don't sort of see those impediments. And, yeah, there will be places maybe where lower-cost items gain a little bit of traction. But because the model is structured in a manner that most of the supply chains takes their margin off of, you know, percentage of the wholesale list. And because you see reimbursement in those markets, there's not a structural reason, you know, to see margin compression. Secondarily, you know, in the rec business in Canada, you're competing against hundreds of manufacturers. And in some cases, some that, you know, need to sell their product at a lower number. In most of the international markets, you know, you really only competing against three or four other manufacturers because of the significant barriers to entry. So you don't see that competitive aspect where you play on price. And lastly, you know, you really are seeing value from clinicians and physicians and patients as they are interested in quality, you know, which, you know, comes at a cost. So overall, you know, we see this as a steady business from a margin standpoint. And we see consistency in market to market. And while there was a little bit of, you know, mixed change that affect the overall margins, there's nothing there structurally that gives us pause.
spk05: And the next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question.
spk04: Thank you. Good afternoon. Good afternoon, Michael. I just wanted to come back to the ATM. You mentioned you've got the remaining amount to go there. And if I caught it right, I think you also said you would anticipate renewing that. Can you just give us a sense, given where your balance sheet is already, what the thinking is? And I guess it's some amount of how much is enough. You know, is there a point at which you would feel like you've exhausted what you need out of the ATM or something that you feel like has got a longer runway? How are you thinking about that?
spk07: Yeah, I think it's a great question because it's, you know, it's so important. much a point of interest right now, which is runway use of cash. What's the right amount of cash. I think first and foremost, you know, people should look at, you know, a company's actions, maybe more so than even what they say. And we've been very, very conservative in our balance sheet, you know, right from the beginning when I got, you know, became CEO, you know, the company worked extremely hard to have a strong balance sheet. And we saw a lot of this disruption and, and, clearly understands, you know, what using the ATM means and what that means to, you know, to others when you look at it. But first and foremost, we believe that it was important for external, you know, stakeholders to see the company to have enough cash to be able to run the business. And obviously that, you know, goes into how much cash you're burning. So we worked extremely hard and we've seen, you know, progression from at one point the company had over a hundred million dollars a quarter in SG&A now to below 30. You know, I've sort of, beating the drum about our cost savings. But overall, it is my belief that the company has to have a certain amount of cash, maybe more so than normal, to give people the comfort that we will be here for this inevitable upside for global cannabis. I mean, I think there's no question that at some point you're going to see a significant amount of profitability opportunities around the globe. We believe in medical first. And the question is, who's going to be there? And we think we're going to be there. So the use of the ATM, you know, is used strategically. You know, I think people have seen we've been good stewards of the cash. We've sold assets quickly and at good prices. We've taken converts down, in many cases, below par. And Michael, I think, you know, we'll continue to do three things. First is always focus on having a strong balance sheet so that we will have the wherewithal to be there when, you know, these opportunities hit, as well as be there when, you know, potential M&A and other things happen, such as Bevo, which we thought was a great play. Secondly, we will be very judicious in our use of cash. And, you know, hopefully people have seen that here. And third, you know, where possible, we will use it to find, you know, margin accretive and profit opportunities. And we were really thrilled this quarter, if you look at our sort of cash use and where it went, that in each of our four key businesses we saw growth. And so I think you put that all together and, you know, you can sort of see that the future will look very similar to how we've used cash in the past.
spk05: And the next question comes from the line of Andrew Carter with Stiefel. Please proceed with your question.
spk01: Hey, thanks. Good afternoon. So I guess what I wanted to know is, do you think you can achieve, like, strip out candidate adult use? Do you think you can be positive EBITDA in that business considering kind of the difficult market and just kind of a second separate question kind of how you you miguel and the board are looking at the business i think i've got right now yeah 274 million dollars of enterprise value do you think that captures what what the sum of the parts potentially is on the medical business canada medical annuity bevo which you can do there And then also just the genetics investment, difficult to value in the markets. Is that a consideration and something you keep in mind that potentially is a floor to consider here? Thanks.
spk07: You're welcome, Andrew. And I think, Bill, let me start with your last question first, and I think absolutely not. We are strong believers in global cannabis as a macro movement and strong believers that medical cannabis in a regulated, reimbursed, compliant manner is is going to be the first mover of all of that. And we are one of the leaders, if not the leaders in that globally. So clearly the valuation and where we see ourselves, we don't think is representative of that opportunity, but we don't have complete control over that. The medical business that was built in Canada and now is finding its way all across the globe in key markets is wonderfully portable, wonderfully defensible, and has extremely high margins, as I've talked about. And as we see new markets coming on, like Australia and Switzerland and Austria, you know, those are tremendous opportunities that only a small subset of companies will take advantage of and, you know, how people value that. So be it. The genetics piece and the science piece, you know, has been sort of sitting there on the side all along. And with having what may be one of the largest cannabis genetic libraries and what may be you know, sort of possessing some of the most important IP around biosynthetics and others, there's going to be value in that, particularly as you get into clinical research and more value. And, you know, we'll have to see, but I clearly think our value overall. Now, you know, the REC piece, can you make money in REC as a standalone is sort of a tough question because we see so many efficiencies and learnings in having both. And it would be an easy, sort of answer to say, well, why don't you just get out of RAC and focus on medical, which is really a strength for us. But you're starting to see that when you're in a market and you have both, there are significant advantages. And we see that with product lines. We see that with innovation. We see that with production. And I think really importantly, you will see that in Germany. And we're very bullish in on not only the opportunities in the progression of medical, but also in rec and having that key learning facility and others and being able to be there at the beginning in medical and then transition in rec will offer significant advantages. And so I get it's easy to sort of take the pieces of the business and compare, you know, medical and rec, but for us, particularly as a manufacturer, you know, working with science and genetics, We see significant efficiencies and advantages in being in both, even if we're not going to be a market leader in every market, say in rec, where we would be in medical.
spk05: And our next question comes from the line of Pablo Zwanek with Cantor Fitzgerald. Please proceed with your question.
spk11: This is Matthew Baker on for Pablo. Thank you for taking our questions. I have a two-part question. Firstly, what explains the stickiness of your market share in the Canadian medical market? And then on the other hand, why is your medical market share in Germany so much less sticky? And then as a follow-up, what are your latest thoughts of when German rec sales will begin? And do you still think imports will not be allowed? Thank you.
spk07: Very welcome, Matt. So Canada, you know, is a hard market. They're all sort of hard, but You know, the reason it's so sticky is we've made really significant investments in this. We've been in it a long time, and we think we're, you know, pretty good at it. We have roughly a 25 share. The next closest competitor is at about a nine share. So this is a piece of business where you have to make a lot of investments. Experience matters, particularly with clinicians and physicians and with clinics. And you have to continue to invest. Call centers, innovation, support mechanisms – science, engagement with key stakeholders and veterans and others. And so it's just a commitment we've made, and I think you have to hit on all cylinders. And I think, you know, without being, you know, sort of, you know, arrogant about it, I think we're pretty good at it and been at it a long time in Canada. In other markets, some other folks, you know, got there first. And it's not always that first mover status matters, but I think it takes more time to for the benefits of our program. So we're pleased with where we are in Germany. We don't have a 25 share. And there's some other good competitors in there. But again, it's four or five companies. So it's not like you're competing against 100 or 200. And so I think we're really pleased with that and where we sit in the German market. And as I mentioned in my prepared comments, we're one of only three companies that have a manufacturing license in Germany, which will play a significant role, we think, as they roll out legalization for the REC. Now, in terms of REC, we're really excited about the German process. I think three primary reasons. First is they're actively engaging with the EU, and the expectation is with what they come up with would be applicable in other markets, Poland, Czech Republic, and others. And we've heard from those regulators in those markets that they're looking to what happens in Germany and the EU. So it might take a little bit longer, but it'll be a much more substantive, a much more broad-reaching piece of legislation. We expect to hear some more from the regulator in late spring, and we do expect enhancements to both what we've heard on the rec side, but also on the medical side, which not a lot of people are talking about. And the current administration in Germany has a big initiative on reducing bureaucracy. And only about 30% of the patients today in Germany are able to navigate through that medical qualification process for cannabis products. And if that was cleared up, you'd see a real big change. 0.1% of the adult population in Germany is in that system. I mentioned Canada at 1%. So any sort of change there will have really outside benefits. So Matt will know a lot more late spring. And as soon as we hear something, you know, we'll let people know. And we do expect some version of REC, you know, sales to happen, say, mid-2025, which is when there's a critical election and there have been some promises made about when this is going to launch. What that looks like, we'll see. But, you know, these things may take a little bit longer. But with a country like Germany, you know, it may take a bit and be a little bit more expensive.
spk05: um you know long time period but when it happens it sticks and so we're willing to you know work with them on that and the next question comes from the line of frederico gomez from agb capital please proceed with your question hi uh thank you good evening uh thanks for taking my question
spk02: My question is just on the adult use side here in Canada. You mentioned that much of your sales increased coming from higher sales of value brands. Should we read into that? Was that more opportunistic or is there any shift in strategy there whereby you plan to rely a little bit more on the value segment to grow volume and maybe accelerate growth on the consumer side? Thank you.
spk07: You're welcome, Fred. No, there's no change in strategy. But I will say one thing that people should take away from this quarter is that Aurora has a unique ability to be opportunistic. So when there's a medical opportunity globally, we can take advantage of it. When there's a medical opportunity domestically in Canada, we can take advantage of it. And so most of the change in what happened, and Glenn referenced this in his comments, is we found ourselves in a very interesting situation where where we grew some flour for Daily Special, and it came in at a 28 or 29 potency, which is absolutely a super premium potency band. But because it was already registered with the provinces, we really had the choice. Do we want to sell it and see the benefit, or do we want to hold on to it and relist it? And we didn't want to relist it. And so, you know, the reality was that product that was an extreme, you know, high potency and great quality went out under the Daily Special brand and had a little bit of compression in our overall margin. So the Thrive team is doing an awesome job, and we do see incremental opportunities to continue to do what we said we were going to do. But where we see things hit in that REC market on the discount play, because we're focusing on operating cash flow, we'll take those advantages as we can. So no change in strategy. It was opportunistic because of the unique situation. And listen, you're thrilled to have that, and it's a testament to great genetics and good cultivation that we found ourselves in that situation, and we're thrilled to be able to have those sales.
spk05: And as a reminder, if you'd like to ask a question, please press star 1. We ask that you limit yourself to one question, please. Our next question comes from the line of John Zamparo with CIBC. Please proceed with your questions.
spk09: Thanks, good afternoon. I wanted to ask about the Canna Health acquisition. I know this isn't hugely material, but $20 million in cash is not meaningless in this space either. So I just would like to get an update on what this asset brings to the table and what the financial implications of it have been so far.
spk07: Sure, I'd be happy to. I've been talking for a bit. Glenn, you want to talk about Canna Health and that deal?
spk06: Yeah, the folks at Canna Health are... very closely attached to some of the key vet influencers in that population. They've been extremely good at building relationships and supporting veteran patients in the medical system, finding the right medicines for them, and just actually kind of almost operating a little bit of a counseling service. We thought that they were a very important part of our supply chain, and we thought since that business was so incredibly important to our profitability, we needed to make sure that we had that relationship locked up for the long term. The acquisition there is really about solidifying the long-term value of our medical business, in particular the funnel of veteran patients and our ability to get very close to those patients, which obviously is critically important to understand their needs. It has started paying off. We actually launched a new product in our medical portfolio in the last month, a product called Valor, which was a cultivar selected by veterans from our coast facility for terpene profile and various attributes. They picked the name and it launched. And, you know, again, it's just being that close to really critical patient population has been important for us.
spk05: And that kind of health is a big part of that equation. Thank you. And as a reminder, if you'd like to ask a question, please press star 1. You may ask one follow-up question. Thank you. And the next question comes from the line of Matt Bottomley with Canaccord Genuity. Please proceed with your question.
spk08: Yeah, thank you. Good evening, everyone. Just wanted to touch on the adjusted gross margin again. And I know, Glenn, you had some prepared remarks about this. When you kind of look at the overall trend over the last three, four, even five quarters, it seems like the ratio of these types of adjustments are still fairly meaningful in relation to the size of your overall revenue. So I understand the general buckets and categories, and you have it in your press release here in terms of what those general categories are. But I'm wondering if you could speak to the changes of maybe what's going in and out of there. I know historically it was more inventory impairment. Now there's more development costs. Given that you're in a variety of different growing medical markets internationally, I would expect these types of costs and these types of opportunities and challenges to continue sort of indefinitely. So I'm just wondering how you're anticipating this adjusted line moving, just given that your actual audited or reviewed statements have pretty nominal margins from an unadjusted standpoint.
spk05: Yeah, thanks. So a couple things going in the margins.
spk06: There's certainly the mix across the categories. Market by market, the margins are holding up quite nicely. So we still see a strong medical margin as we've seen over the past several years, number of quarters in the Canadian medical. Consumer, the margin this quarter was generally mixed related, as Miguel just described, and opportunistic and certainly incremental. Don't mind the extra gross profit. And then the other piece that you're referring to, you threw a couple things in there that aren't hitting margin. What we adjust out of our margins are fair value adjustments, of course, because it's a not-for-us thing, but it's confusing. And depreciation, we're trying to get to a cash margin that will allow you to understand the underlying ability of the business to generate cash. This quarter, there was an adjustment for a one-time affected BEVO. I don't know if you're following natural gas prices, but they spiked tenfold in December due to some weather in California, and then came right back down in January. So it was just the first time, never seen that before, one-time transitory thing. We thought that wasn't very reflective of the true gross margin. So we will look at trying to paint a picture for you of the underlying ability of the company to generate cash flow. I think that we will see less adjustments through EBITDA as we go forward now that we've finished the business transformation or completed our objective there. There has been through that transformation with facility shutdowns and changes in transferring manufacturing lines, a lot of SG&A reductions, a fair amount of noise in our financials, but I think we're past that now in Q3. You should see the level of those sorts of adjustments coming down.
spk05: Thank you. At this time, we have reached the end of the question and answer session. I would like to turn the floor back over to Miguel for any closing comments.
spk07: Well, first and foremost, let me thank everybody for your interest and time. We're thrilled with where we are. I would say this is absolutely not the finish line. If you take anything away from this call is that our strategic plan is working, and we're thrilled with what we did here, but we're also thrilled with where we're going forward. Appreciate everybody, your interest, and we look forward to talking to you in the future. All the best. Bye.
spk05: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.
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